One of the hardest things to engage in is the cost justification of a technology and its positive impact on an organization. In general, there are objective and there are subjective benefits from the implementation and adoption of a system into an organization’s operational profile.
- Objective benefits are those that have calculable value – such as the savings of the time spent by a person (of a specific role) to perform a specific function.
Example being the elimination of the multiple entry of data into two or more systems that have been replaced with only one system such as a PLM system. (The term system could be an actual secondary system, or it could be a spreadsheet, or an email – which alters the below calculation – but not significantly.)
If it takes a person (on average) 3 minutes to enter the data into a secondary system and they are paid $70,000 (on average; fully burdened), then 3 minutes equals $3.58.
Since most people have to get to the system, find the appropriate input form (screen / panel) we will (on average) consider 1 minute to get “setup to perform the activity”; which is another $1.58; and then they have to exit the system and “transition to the next activity”; which is 1.5 minutes (on average); which equals $2.08.
This activity results in a TOTAL spend in labor cost equaling $7.25. For those that do better with tables:
We then take that numeric calculation and amplify it by the number of times per day (example 5 - on average) and multiply it by number of days per year (example 250 - on average) per person, and we then multiply it by the number of people (of that role) performing that task (example 7 - on average), and we get over $73,000. This is then again amplified by all the various time wasted for similar activities per that role and other roles and it begins to crank up the cost of NOT having a system (i.e. PLM) that supports the various functions and maintains all the data in one place (one version of the truth).
Again – this is one of the basic profiles that incur Objective Costs of conducting business with multiple systems, or spreadsheets, emails, phone calls, meetings, …
- Subjective costs are those that are not definitively calculable and are most often situational, resulting from not having (as an example) a PLM system (or one version of the truth) that sets the stage for:
Erroneous data being entered into a spreadsheet that is used by another organization for ordering a specific product for testing. By entering the wrong product ID, it would then cause a delay that could be one week, or one month in getting the correct product tested.
How does one calculate that time lost:
- Some might calculate its cost to the business as being $80,000 in sales due to the delay in getting that product into market in a timely manner.
- Others might say it’s a $300,000 loss in revenue because that product never makes it to market since its lag in getting tested puts it outside the production cycle all together.
The point is that Subjective Cost factors are wide ranging, very difficult to calculate the cost of, even “after the fact”, and are not costs that occur on a consistent basis.
However, they erode the bottom line just as much (if not more) than Objective Cost factors.Back in the mid-90’s I formulated a Cost Justification Toolkit for companies acquiring and implementing PLM in the aerospace, automotive, high-tech, medical device, and discrete industry, focusing on the initial PDM benefits of centralized CAD file management, revision control, configuration management, backup / recovery, and archival / restoration. It was “archived” by the Internet Archive back in the mid/late 90’s and is still listed (but no longer obtainable). It was used in mass by companies in those industries and formed a means of quantifying the value of PDM for those breaking ground on the use of this “new technology referred to as PDM”.
Cost Justifying Systems Integrations
The profile of cost justifying the integration of 3rd party systems and services (SaaS) with today’s Product Lifecycle (vs Data) Management systems is achieved using the same profile of Objective and Subjective cost benefits.
In a recent discussion with an Engineering Manager at a large retail company, some examples were provided of cost benefits that apply directly to the value of establishing PLM based Systems Integrations. Focusing on direct Objective Cost recovery, he states:Regarding manual data entry into downstream systems – the simple answer is to take the hours spent by resources reentering data manually and multiply by their fully-loaded pay rate and this would be a perpetual savings. If enough of these types of investments [PLM based Systems Integrations] are made, they would improve operational efficiency and improve metrics such as:
- Improve Revenue / # FTE’s
- Reduce Costs to create a style (ratio = total costs / # of styles created)
Another cost metric is when IT resources spend too much time on manually moving data between systems – which is calculated by their value add per year (revenue, margin, quality) divided by the # of FTEs on the IT support team. For example, if on your support team you have 2 developers working on value-add projects and 2 developers / contractors working on maintenance [moving data] – ideally you would like to improve this ratio to 75% or higher working on value-add projects versus maintenance [moving data] work by digitally transferring that manually entered data directly from PLM to that support system.The engineering manager also introduced Subjective Cost benefits of establishing PLM based Systems Integrations that eliminate:Operational delay in getting product and price information to e-commerce – the measurement would be an analysis of the sell-thru metric. Sell-thru – keeping all other factors the same – will improve. This means that without any delay in getting information to the e-commerce site that the products can be sold earlier in the season at the higher prices and will not have to incur the discounting process specifically attributed to the delay.
- This is in addition to eliminating the costs associated to data being manually entered erroneously, which causes customer experience issues, direct loss of product sales, cost of shipping (and having to pay return) of the wrong product … and so on.
Add to this the elimination of Subjective Costs such as:
- Lag time in email or spreadsheet-based posting of Product / Colorway information and images passed from PLM to Voice of the Customer (VoC) and receiving then the test results in emails or spreadsheets; Days mean dollars and could cause key decisions to be delayed past line snap;
- Erroneous Bill of Material data entry at the Factory, resulting in product quality or mismatches in material features, further resulting in loss sales or high return rates;
- The list (and yours) continues …
Conclusion
The PDM Cost Justification Toolkit of the 1990’s helped companies in aerospace, automotive, high-tech, medical device, and discrete industry save hundreds of thousands to millions of dollars in Objective (direct) and Subjective (indirect) Cost savings. It is not a black art or a dark science; it is situational analysis combined with basic mathematics.
Objective and Subjective Cost Savings are achievable in the Retail Market: and all are calculable by performing a cost / benefit analysis to justify the digital integration (digital fluidity) of a Retail PLM system to 3rd party systems / services (SaaS).
The Principals of Digital Solution Group are experienced in performing the Cost Justification of PLM based Systems Integrations.
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